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Coal

Industry Insight

Date April 2018

Synopsis

Current trends

The U.S. Energy Information Administration (EIA) forecasts coal production to decline by 5% to 738 million short tons (MMst) in 2018

Equipment values will likely remain soft in the current marketplace, as further plant and mine shutdowns add to the supply in the already well supplied surplus marketplace

Coal-related inventory values should remain somewhat stable as long as pricing remains stable and the decline in market volume is gradual

Failing industry: Despite the Trump administration’s promises to resurrect the U.S. coal industry, the industry continues to decline. The impact of government regulation, health and safety issues, and a push toward greener fuel options domestically have all decimated the industry over time. The Hill notes that President Trump moved aggressively in his first year in office to roll back regulations he says have harmed America’s coal miners. However, the industry remains mired in long-term decline, a downturn that even the current administration’s government agencies predict will worsen over time. Over the past year, the administration has attempted to roll back regulations including the Obama administration’s Clean Power Plan, which created new environmental requirements for coal-fired power plants, as well as its Stream Protection Rule, in an attempt to help reignite the industry. Despite these regulatory maneuvers, the industry continues to lose market share.

Based on EIA figures, year-over-year through January 2018, U.S. coal production was down 7.7 percent. The EIA forecasts coal production to decline by an additional 5 percent to 738 MMst in 2018. The production decrease is largely attributable to lower forecasts of coal use in the electric power sector (projected to be down 4 percent in 2018). Further, the EIA projects American consumption of all energy sources except coal will increase significantly in the next several decades. At the same time, coal production is expected to decline by an estimated 85 MMst, or more than 10 percent, within the next five years.

Competition from natural gas: Natural gas continues to be a major industry competitor as it is cheaper, becoming more abundant, and is relatively easy to integrate as a replacement for coal in the electric power industry. Natural gas prices have decreased 80 percent in the last several years due to the shale gas boom. In addition to low prices, natural gas plants enjoy a “cleaner” reputation and are more flexible in the face of fluctuating demand. That is, while coal plants are more reliable for base-load power, natural gas plants are much quicker to start up when power demand spikes.

Electricity generation from natural gas exceeded that from coal for the first time on record in 2015. As a result of the continuing pressure from natural gas production, the EIA forecasts coal production to decline by 5 percent in 2018. Lower expected global demand for U.S. coal exports in 2018 and 2019 also contributes to the forecast for lower coal production. However, the EIA expects coal production to increase slightly to 748 MMst in 2019. Natural gas supply and pricing will continue to be one of the most notable outside influences on the coal market, with the EIA expecting a 40 percent increase in natural gas consumed in the U.S. industrial sector by 2050, making it the most consumed fuel in the country.

Industry outlook: The coal mining industry is expected to recover slightly over the next five years, as slowing economic growth in major global markets (e.g. China) continues to place downward pressure on product prices based on information from research firm IBISWorld. However, slower growth in emerging economies will also hurt demand for U.S. metallurgical coal and cause prices to remain volatile. It is possible that the March 2018 steel tariff actions may spur domestic production of steel, which accordingly, could have a positive impact on metallurgical coal prices. As the push to seek alternative sources of energy expands globally, natural gas will continue to impact the demand for coal. Although demand from emerging economies is not expected to reach historical levels, countries will still demand metallurgical coal at high rates to satisfy steel needs. Additionally, the consumption of electric power is projected to expand, offering some relief to industry operators. Consequently, industry revenue is projected to grow slightly at an annualized rate of 2.8 percent to $32.3 billion through 2022.

Current appraisal critical: Given the current declining market, values have the potential to change quickly. Lenders with coal mining assets in their portfolios that have not been valued during the past six months should seek a new appraisal immediately. Equipment values will likely remain soft in the current marketplace, as further plant and mine shutdowns add to the supply in the already well-supplied surplus marketplace. Coal-related inventory values should remain somewhat stable as long as pricing remains stable and the decline in market volume is gradual. Any inventory supported by long-term supply contracts should be vetted thoroughly to ensure that these contracts are not subject to disruption or termination as coal-fired power plants close.